Week 4 Session 1 2011

# Week 4 Session 1 2011 - Week4 Elasticity Text;Ch4 Outline:

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1 Week 4 Elasticity Text; Ch 4 Outline:  Price Elasticity of Demand – Definition and Measurement Calculation – Point and Arc Elasticity Elasticity and  the Slope of the Demand Curve Determinants of Elasticity Elasticity and Revenue/Expenditure Other Types of Elasticity of Demand Elasticity of Supply Diane Enahoro Session 1 2011

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Who needs to know about elasticity and why? 1. Governments for tax policy  pricing of public utilities 2. Businesses  Pricing policies Investment opportunities Can you think of any others? Diane Enahoro Session 1 2011
3 Definition: A measure of the responsiveness of one variable to  changes in another. Price Elasticity of Demand    for a good/service is the  percentage change  in the quantity demanded  of that  good/service that results from a  one-percent change  in its price. E = % D Qx % Px Change in Q divided by Q times 100% Change in P divided by P times 100% Elasticity of demand is negative but we use the absolute value of elasticity. Diane Enahoro Session 1 2011

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4 Calculating  Price Elasticity of Demand 1. Arc (average or mid-point) elasticity Assume a linear relationship with two price and quantity observations. Which Price do we use where DQ/DP x P/Q? P D Arc Elasticity = Q a b P1 Q 1 Q 2 P 2 D Diane Enahoro Session 1 2011
5 Calculating  Price Elasticity of Demand  - an example 1. Arc (average or mid-point) elasticity Assume a linear relationship with two price and quantity observations P Q a b 100 80 120 180 D Arc Elasticity = 2.5(a) or 4 /3(b) Using the mid-point formula calculate the elasticity of demand if P falls from

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## This note was uploaded on 04/02/2012 for the course ECON 1101 taught by Professor Julia during the Three '08 term at University of New South Wales.

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Week 4 Session 1 2011 - Week4 Elasticity Text;Ch4 Outline:

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